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Oil refining in Europe has been in decline for decades. UK numbers have shrunk from 12 to 7 in 20 years, while Germany has seen a reduction from 16 to 12 since 2012 – a trend typical across the whole continent.
Oil refineries are built, primarily, as the source of the major transportation fuels – that is, gasoline, diesel and jet fuel. As the drive by governments to zero carbon emissions progresses, the pressure on those surviving refineries grows ever greater; the Covid-19 pandemic has only added further downside to this. In order to predict the future of this industry, a number of factors must be considered.
The investment required to find and develop an oil field to the point of producing its first barrels amounts typically to billions of dollars. As the process of discovery to production takes several years, the financial payback time is significant, and in the near future this may be prohibitive to many oil majors with plans to move into low-carbon energy production, with all the large investment that this would entail.
The impact on the European refining industry is that crude oil supplies, imported from outside the continent, would be increasingly limited, with input cost implications.
With major car manufacturers announcing the demise of any further development of the internal combustion engine in the near future, and with R&D budgets directed at electric drive trains and batteries, it is likely that peak demand for traditional road transportation fuels may arrive in the next few years.
While this does not mean that all refined road transport fuel production will cease at this time, it is clear that sometime soon the demand will reduce irretrievably and therefore production must follow.
The expected pressure on crude supply, as mentioned above, will restrict the range of feedstocks available. This means that refineries designed with the capability of processing a wider “basket” of crudes will be less constrained by plant limitations, and hence better able to purchase feedstocks at a more competitive price.
Those refineries without this flexibility will face accelerated closure; those that survive, however, may be only experiencing a stay of execution.
Up to now, refineries that have had an advantaged connection to markets were typically in a stronger commercial position. Examples of this include pipeline links to storage facilities surrounding major population centres, pipeline links to airports, close proximity to petrochemical facilities. However, as demand for these products is likely to pass its peak in the next few years, this may no longer be the obvious strength as it previously has been.
Facilities that have formerly enjoyed this advantage may be forced to seek export markets further afield, if this can be achieved in sufficient quantities, with all the attendant competitive pressure on pricing that this would entail.
There are still predominantly internal combustion-engined vehicles on Europe’s roads, using diesel or gasoline. Both of these fuels have “sustainable” substitutes currently available – indeed much of Europe’s gasoline and diesel currently contains up to 10% biofuel. Whether production capacity could ever be sufficient, however, a total replacement of biofuels is highly unlikely given the typical production cost, and the diversion of potential foodstuff (usually grain for gasoline and animal/vegetable fat for diesel). In addition, these fuels have worse economy (miles-per-gallon) than the crude-derived originals.
Jet fuel is a different case. At this time, there does not appear to be a viable alternative to the existing kerosene-based fuel. Although some progress is being made with algae-based alternatives, and hydrogen is also under consideration, the sheer quantity required for what has become normal (pre-pandemic) consumption tends to rule out the former; and the issues with producing, distributing and on-board storage of the latter suggest that petroleum-derived jet fuel will be required for many years. Electrically driven planes are still an idea for the future (if that) – witness the high weight of batteries and their low energy density compared to conventional jet fuel.
Fuel for shipping, at this time predominantly gas oil (a heavy form of diesel), will also be difficult to substitute in the near future. The effort and investment required to take shipping out of service and then retrofit greener drive trains will prevent many shipping lines from attempting this. What will they do when supplies virtually cease?
Many European governments have set a deadline for banning the sale of new petrol/diesel engined cars (2030 in the UK). This gives enormous incentives to car manufacturers to develop new ranges as quickly as possible before it is too late to recover market share – regardless, this may be existential for some of the more complacent firms. The main constraints to expanding electric car ownership are battery availability and the provision of adequate fast-charging facilities. In the former case, battery supply looks set to expand rapidly in Europe over the next few years. Building a charging network involves more of challenge, in part to government and local authorities – although the average length of journey undertaken is only 30 miles which may somewhat mitigate requirements.
No new refineries have been built in Europe for some decades, while newer, larger, more efficient and sophisticated facilities have been constructed in Asia and the Middle East. Should the factors above coalesce in the near future, it is likely that these advantaged refineries will be able to supply products into European markets, which will probably signal the end of most of the European industry.
Apart from the main transport fuels, refined products can also be directed as feedstock to petrochemical processes. As much of this ends up in the form of various plastics, and with plastic pollution becoming a major environmental issue, the emergence of the “circular economy” may be key. Here waste plastics of many kinds are combined and melted into a liquefied form, gasified and then synthesised into feedstock for further processing into new plastics, thus avoiding incineration, landfill and the need for much new plastic production. If this approach becomes significant it will potentially reduce or even eliminate this market for refined products.
All the above factors represent major threats to the European refining industry. Clearly the point of peak crude demand is not far ahead, and no oil company would want to invest in a facility that may be virtually useless before completion. This in turn means that restricted product supply is likely to cause price rises, paradoxically, before peak demand – but instead of stimulating investment, it will accelerate the transition away from fossil fuels and, hence, the main raison d’etre of oil refineries.
Apart from the commercial aspects of the industry, there are also questions over how the military will be supplied with various fuels for its jet planes, helicopters, tanks and ships – a particularly valid point at the time of writing. The risk in allowing nature (the market) to take its course might mean inadequate supply lines of critical fuels in future times of crisis, which would be the case for many European countries for many years as there is no emerging, viable alternative to conventional petroleum fuels in a tactical, battlefield scenario (imagine having to recharge batteries in the middle of a tank battle).
The European refining industry has shrunk steadily under commercial pressures for decades. There are still “zombie” facilities which are supported by governments for political rather than commercial reasons – governments often being shareholders as well as stakeholders.
But all the remaining refineries can now be considered vulnerable as ever greater threats emerge: the move to electric road (and other?) vehicles; the competitive threat from newer, more efficient facilities desperately seeking markets; smarter feed options for plastics manufacturers; and, particularly, the squeezing of investment. All these can be expected to lead to a cull of Europe’s refineries, probably in the next 10 years. The only exception may be the retention of a few facilities to provide strategic cover, both commercially and militarily for nation states within the continent.
The coming years will bring unprecedented change and disruption to the world as a whole as the hydrocarbon age comes to an end. The death of Europe’s refineries is just one aspect of what’s coming – we’d better fasten our seatbelts.